Shockingly expensive death spiral for Valirx, dump this toxic stock while you can (VAL)

Friday’s announcement from Valirx
(LSE:VAL), which saw it reveal that it has entered into a shockingly
expensive death spiral with European High Growth Opportunities (EHGO), is downright contemptible. We appreciate that
companies will always try to put a spin on negative news, but the claims from
CEO Dr Satu Vainikka that “this investment” is “at a premium” are
disgracefully misleading. It is so disappointing that the company’s nomad,
Cairn Financial, allowed this RNS to go out, but be under no illusions. This
toxic deal spells the end for shareholders (and almost certainty the company).
Sell this stock while you can and never look back.

EHGO shot to prominence last year
when it bailed out lying “tech entrepreneur” Joao Andrade, of Widecells (LSE:WDC) infamy. That convertible loan
was a disaster. It led to an immediate 75% collapse in the Widecells share
price and effectively stuck a stake through its failing business model. The
clumsy execution of that convertible loan has made it extremely difficult for
EHGO to extricate itself from that mess, but clearly the clever people behind
the opaque Luxembourg fund are unperturbed.

They returned to us on Friday morning
with a new box of tricks, no doubt believing that – as the smartest people in
the room – they can foist whatever crap onto the retail market they like and
mug punters will just lap it up.

Let’s hope they’re wrong.This Valirx deal is appalling.

Let’s start with the headline
terms of the so-called “investment at a premium”. Valirx claims it is
going to receive three tranches of £426,000 between 01 May and 14 June, raising
gross proceeds of £1,278,000 at a subscription price of 0.6p per share. Valirx’s
mid price is currently 0.4p, so technically one could claim that the price of
the EHGO death spiral is at a premium.

But hold on a second there…

First, Valirx has agreed to pay a £278,000
“structuring fee” to EHGO, meaning the net amount the company MIGHT
receive is £1,000,000. Excuse the exaggerated emphasis of the word “might”, but
you’ll soon see why it’s justified.

Scroll a bit further down the RNS
and we discover:

“The Agreement stipulates that the Investor shall provide to the Company additional financing by way of Convertible Funds, subject to signature by both parties to definitive documentation by 21 June 2019.

Should definitive documentation not be signed by 21 June 2019, ValiRx shall be required to pay the investor a break fee totalling £150,000 (the “Break Fee”) plus an additional amount in the event the Company’s share price declines in the period to the date the Break Fee crystallises. This additional amount is to be calculated by multiplying the stock performance of the Company (expressed as a percentage) by £1,000,000.”

If Valirx’s share price falls 50%
and the company fails to execute documentation on the wider convertible loan
package, it will owe EHGO an additional £650,000! (£150,000 break fee + £500,000
fee for the share price dropping 50%).

Given how likely it seems both events will happen, EHGO must think it is on to an absolute winner with Valirx.And this is on top of the £278,000 “structuring fee” already mentioned.

Using these figures, this would
mean if Valirx’s share price is at 0.26p on June 21 and the company fails to
execute the wider convertible loan package it will owe EHGO an eye-watering £928,000.
On an “investment” of £1,278,000.

This is the worst kind of carcass
picking profiteering we see on AIM. It would be far better just to kick these
walking dead companies off the Exchange.

The pretence that this accelerated
death spiral has been executed at a premium is a further embarrassing sham. The
deal with EHGO is a disaster for shareholders. The company must be in the most
desperate of positions to have agreed to it. It is shameful that Vainikka said
what she said, and it reflects poorly on Cairn that they let the statement go
out.

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Ben Turney does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.

Ben Turney has not been paid to produce this piece by the company or companies mentioned above.

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The S&P500 has reached new highs again. It’s likely to run on to tackle the 3000 milestone level shortly, where the chart suggests strong headwinds lie. But during the past decade bull run, (assuming we’re still in one) investors have seen this scenario play out positively before - where a big move upward followed with gusto, despite seeming unlikely. Will the third time be so lucky?

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